Targeting a low interest rate scenario, the Reserve Bank of India (RBI) on Saturday stepped up its efforts by unveiling a host of measures including further cut in key rates for the third time in less than two months, in a bid to spur investments and demands in both retail as well as corporate sectors to revive economic growth.
The central bank as part of massive economic stimulus package (the other measures will be announced by the centre on Sunday) has further slashed the repo rate by 100 basis points from 7.5% to 6.5% and cut the reverse repo rate at which it borrows overnight to 5% from 6%. The cut in the reverse repo rate is the first time since 2003.
However the central bank has maintained a status-quo in the cash reserve ratio (CRR)and the statutory liquidity ratio(SLR).
?The cumulative impacts of the today?s measures, together with earlier measures, should step up the demands and arrest the growth moderation. In particular, the reduction in the repo and reverse repo rates should result in a reduction in the marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms,? said RBI governor D Subbarao while announcing the measures at a press conference convened at RBI headquaters on a holiday.
Explaining the need of these measures, Subbarao said the outlook for India going forward is mixed. There is evidence of economic activity slowing down. Real GDP growth has moderated in the first half of 2008/09.Industrial activity, particularly in the manufacturing and infrastructure sector is decelerating. ?The service sector which has been our prime growth engine for last five years is slowing. For the first time in seven years, exports have declined in absolute terms in October. Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity. Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence,?? Subbarao cautioned.
However, on positive side, headline inflation, as measured by the wholesale price index, has fallen sharply, and the decline has been sustained for the past four weeks, pointing to a faster than expected reduction in inflation..
?The reduction in prices of petrol and diesel announced last night should further ease inflationary pressures and inflation will fall below 7% by March 2009,?? he added.
To enhance credit delivery to the employment- intensive micro and small enterprises sector, RBI has decided to provide refinance of an amount of Rs 7,000 crore to the Small Industries Development Bank of India (Sidbi) and Rs 4, 000 crore to National Housing Bank(NHB) for loan to small units.
The central bank further liberalised buyback of foreign currency convertible bonds by the corporates. The corporates now are permitted to apply for the premature buyback of FCCBs from their customers under the approval route where the source of funds for the buyback is foreign currency resources held in India, fresh ECB raised in conformity with the current ECB norms and there is a minimum discount of 15% on the book value of the FCCB.
In addition, the central bank will consider applications for buyback of FCCBs out of rupee resources provided that there is a minimum discount of 25% on the book value and the amount of the buyback is limited to $50 mln of the redemption value per company.
However, to avail the facility, the resources for buyback has to be drawn out of internal accruals of the company as certified by the statutory auditor, said RBI.
In another measure to boost retail housing sector, the RBI has said the loans granted by banks to housing finance companies(HFCs) for on-lending to individuals for purchase or construction of dwelling units may be classified under priority sector, provided the housing loans granted by HFCs do not exceed Rs 20 lakh per dwelling unit per family. However, the eligibility under this measure will be restricted to 5% of the individual bank?s total priority sector lending. This special dispensation will apply to loans granted by banks to HFCs up to March 31, 2010, the RBI said.
Under the current guidelines, exposures to commercial real estate, capital market exposures and personal or consumer loans are not eligible for the exceptional regulatory treatment of retaining the asset classification of the restructured standard accounts in standard category. ?As the real estate sector is facing difficulties, it has been decided to extend exceptional or concessional treatment to the commercial real estate exposures which are restructured up to June 30, 2009,? Subbaro said.
In the face of the current economic downturn, there are likely to be more instances of even viable units facing temporary cash flow problems. To address this problem, RBI has decided, as a one time measure, that the second restructuring done by banks of exposures, other than exposures to commercial real estate, capital market exposures and personal or consumer loans, up to June 30, 2009, will also be eligible for exceptional regulatory treatment.
In view of the difficulties faced by exporters on account of the weakening of external demand, RBI has decided that the prescribed interest rate as applicable to post shipment rupee export credit, not exceeding BPLR minus 2.5 percentage points may also be extended to overdue bills up to 180 days from the date of advance. Subbarao further said that the RBI is planning to make corporates bonds available for repo.
